TaxTMI 
TaxTMI 
2008 (12) TMI 19
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....ondent. JUDGMENT The judgment of the court was delivered by RAJIV SHAKDHER, J - In the captioned writ petitions, a challenge has been laid to the orders passed by the Transfer Pricing Officer (hereinafter referred to as the 'TPO') whereby he has determined the Arm's Length Price (hereinafter referred to as 'ALP') in relation to 'International transactions' entered into by each of the petitioners with their Associated Enterprises. The orders of the TPO which have been challenged in each of the writ petitions are as follows:- (i) WP(C) No 6974/2008: Impugned order dated 22.08.2008 (ii) WP(C) No 7958/2008: Impugned order dated 23.09.2008 (iii) WP(C) No 7969/2008: Impugned order dated 30.09.2008 (iv) WP(C) No 8054/2008: Impugned order dated 24.10.2008 (v) WP(C) No 8055/2008: Impugned order dated 30.09.2008 (vi) WP(C) No 8597/2008: Impugned order dated 17.10.2008 2. The counsel for the petitioners, as well as, the Ld. ASG appearing for the respondent have addressed their submissions before us, which are, common to each of the afore-mentioned writ petitions. 2.1 The petitioners were represented by Mr S Ganesh, Sr Advocate and Mr Ajay Vohra, while the resp....
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....iated Enterprise. This, according to the learned counsel, is particularly so, in view of the fact that the determination of ALP involves scrutiny and analysis of data of enterprises, which is, involved and hence, tends to be invariably complex. It was his submission that prior to the amendment brought about by virtue of Finance Act, 2007, w.e.f. 1.6.2000, the assessee was afforded an opportunity of presenting its case, both before the TPO, as well as, before the Assessing Officer. However, with the amendment brought about in section 92CA(4) by virtue of the Finance Act, 2007, the Assessing Officer is required to compute the total income of the assessee in 'conformity' with the ALP determined by the TPO. 4.3 It is his submission that post the 2007 amendment in Section 92CA (4), the proceedings before the TPO have the colour and texture of a regular assessment under Section 143(3) of the Act. As a matter of fact, he contends that the language of the provisions of Section 143(3)(i) and (ii) are pari materia with the provisions of sub-section (2) and (3) of Section 92CA. 4.4 Mr S. Ganesh further contended that the lack of fairness in the procedure adopted by the TPO was evident f....
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....ollector and Anr (1983) E.L.T. 2293 at page 2300 (paragraph 7). 4.7 Similarly, Mr Ajay Vohra who appears for the petitioner in writ petition no. WP(C) No. 7958/2008, WP(C) No. 7969/2008, WP(C) No. 8054/2008, WP(C) No. 8055/2008 and WP(C) No. 8597/2008, contended that apart from the fact that the impugned orders of the TPO were liable to be set aside on the ground that no oral hearing had been granted before the final determination of the ALP by the TPO: the impugned orders of the TPO were a nullity in the eye of law as the petitioner/assessee had not been confronted by the TPO with material or information which formed the basis for the determination of ALP by the TPO. It was the submission of Mr Vohra that it was incumbent on the TPO to confront the assessee with the material collected, and give an opportunity to the petitioners/assessee to rebut the same. In the event the TPO failed to do so, he could not have relied upon the said material which was collected behind the assessee's back and used without the petitioners/assessee having any notice of it. In that sense, it was contended by Mr Vohra, that it would not help the cause of the Revenue in projecting before this Court tha....
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..... A right to effective representation would suffice. The learned ASG in this regard relied upon the following judgments:- UOI vs Jesus Sales Corporation (1996) 4 SCC 69, pr 5, pg 74, 75; Carborundum Universal Ltd vs CBDT (989) Supp (2) SCC 462, pr 6, pg 464; Hira Nath Mishra and others vs The Principal, Rajendra Medical College (1973) 1 SCC 805, pr 12, pg 809, 810; SBI vs Allied Chemicals Lab. (2006) 9 SCC 252, pr 6, pg 253 5.3 He further submitted that the application of the principle of natural justice is always contextual, which is more so, in taxation matters. To buttress his submission reliance was placed on the following judgments of the Supreme Court:- N.K. Pasanda vs Government of India (2004) 6 SCC 299, pr 24, pg 308; Chairman, Board of Mining Examination vs Ramjee (1997) 2 SCC 256, pr 13, pg 261, 262; Ajit Kumar Nag vs General Manager, Indian Oil Corp. Ltd (2005) 7 SCC 764, pr 44, pg 785 5.4 In the alternate, the learned ASG submitted that even where oral hearings are mandatory, the failure to afford such an opportunity would not render the decision invalid solely on that ground, as a defect, if any, could be cured in the appellate proceedings. ....
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....e Constitution of India. The practice adopted by Court's, is to normally dissuade an aggrieved party to come directly to the High Court, by exercising his right to avail of extraordinary remedy, where an effective and efficacious alternate remedy is available. This, however, is a rule of convenience and not a rule of law. The court is empowered to entertain a writ petition under Article 226 of the Constitution of India, even though there is an alternate remedy available to an aggrieved party. The discretion in this regard vests entirely with the Court which is to be exercised by the Court keeping in mind the facts and circumstances of each case. We, accordingly, reject the objection raised by the respondents as regards the maintainability of the writ petitions on the ground of alternate remedy. 6.3 Now coming to the substantive part of the matter. The case of the petitioner is pivoted on the provisions of sub-section (3) of Section 92CA of the Act. In order to appreciate the true scope, width and amplitude of the provisions of Section 92CA(3) it would be important to set out the contextual background, purpose and object with which Chapter X of the Act, which is titled, 'special ....
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....isting section 92 of the Income Tax Act was best explained in the following paragraphs of the said Circular no. 14/2001. 55.2 Under the existing section 92 of the Income Tax Act, which was the only section dealing specifically with cross border transactions, an adjustment could be made to the profits of a resident arising from a business carried on between the resident and a non-resident, if it appeared to the Assessing Officer that owing to the close connection between them, the course of business was so arranged so s to produce less than expected profits to the resident. Rule 11 prescribed under the section provided a method of estimation of reasonable profits in such cases. However, this provision was of a general nature and limited in scope. It did not allow adjustment of income in the case of non-residents. It referred to a 'close connection' which was undefined and vague. It provided for adjustment of profits rather than adjustment of prices, and the rule prescribed for estimating profits was not scientific. It also did not apply to individual transactions such as payment of royalty, etc., which are not part of a regular business carried on between a resident and a non-res....
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....sion crucial for determination of ALP, which is, Section 92C. Sub-section (1) of section 92C provides that ALP in relation to an 'international transaction; could be determined by any of the methods provided in the said sub-section which is 'most appropriate' having regard to the nature of transactions or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors which may be prescribed by the Board. The methods provided being (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method and; (f) such other method as may be prescribed by the Board. In determining the most appropriate method, regard is to be had to rules 10A and 10B of the Income Tax Rules, 1962 (in short the 'Rules'). Sub-section (3) of section 92C makes it amply clear that the primary burden in computing the ALP is that of the assessee. The Assessing Officer would proceed to determine the ALP in relation to an 'international transaction' in accordance with sub-section (1) and (2) of section 92C only if he is of the opinion that any of the circumstances as indicated ....
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.... (3) of Section 92D and after considering such evidence as the TPO may require on any specified points, and after taking into account all relevant material which the TPO has gathered. The TPO is required to send a copy of the order, whereby a determination of ALP is made both to the Assessing Officer and the assessee. Sub-section (3A) of Section 92CA provides a time frame within which the TPO is required to pass an order under sub-section (3) of section 92CA. Sub-section (3) of Section 92CA reads as follows:-'On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of Section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of Section 92C and send a copy of his order to the Assessing Officer and to the assessee.' 6.6.4.1....
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....may be prescribed, in respect of its international transactions. The documentation which the assessee is required to maintain, is provided in rule 10D of the Rules. Sub-section (3) of Section 92D empowers the Assessing Officer or the Commissioner (Appeals) to request the assessee to furnish any information or document as may be sought within 30 days of being served with such a notice. This period of 30 days on an application being made is extendable by a further period not exceeding 30 days. 6.6.6 Section 92E provides that parties, who have entered into an 'international transaction' during the previous year, shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by an accountant setting forth, such particulars, as may be prescribed in Rule 10E. The report is required to be prepared and submitted in the prescribed Form 3CEB. 6.6.7 Section 92F defines various terms and expressions used in Sections 92 to 92E. The definition of ALP is provided in sub-clause (ii) of Section 92F. 6.6.8 A necessary adjunct to chapter X of the Act, are certain provisions contai....
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....nalty imposable is, a sum equal to 2% of the value of the international transaction for the each such failure. 7. An overall review of the provisions, if summarised, broadly is as follows:- 7.1 Under Section 92, an Assessing Officer is empowered to compute income from international transactions which involve transfer pricing provision having regard to ALP. The meaning of what would constitute an associated enterprise or an international transaction is provided in section 92A and 92B respectively. The manner of computation of ALP is set out in section 92C. The primary burden in regard to computation of ALP is that of the assessee, which the assessee is required to compute by resorting to the most appropriate method amongst those mentioned in sub-clause (a) to sub-clause(f) of sub-section (1) of section 92C, having regard to the nature of transactions or the class of transaction or even class of associated persons or functions performed by such persons or such other relevant factor as may be prescribed by the Board. In this respect, regard is required to be had to the factors prescribed in Rule 10B. In the event the Assessing Officer has doubts with regard to the ALP dete....
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.... the issue as to what could be regarded as 'civil consequences' in a given case. The expression of 'civil consequences' has been best explained by our Supreme Court in the case of Mohinder Singh Gill vs The Chief Election Commission: (1978) 1 SCC 405 at 440. The Supreme Court has observed that civil consequences involve infraction of not only property and personal rights, but also, actions which impinge on civil liberty of an individual or result in material deprivation or even result in non-pecuniary damages. 7.3 Keeping in mind the test as enunciated by the Supreme Court in the case of Mohinder Singh Gill (supra) and State of Orissa vs Dr (Miss) Bina Pani Dei (supra), we have no doubt in our minds that the provisions of sub-section (3) of section 92CA cast a duty in no uncertain terms on the TPO to afford an opportunity of an oral hearing. This is clearly so in view of the fact that as courts have carved out this important safeguard in favour of the aggrieved parties even where the statute is silent, unless there is exclusion of such a right by way of an explicit provision or by necessary implication. In the present case, however, given the words of the statute, we have ....
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....hearing. An enquiry of the kind which is contemplated under Chapter X by the TPO will achieve a far more fair result, if there is an opportunity for an oral hearing or personal representation. The observation of Megarry J, in John vs Rees, (1969) 2 All. ER 274 best illustrates the point as to why it is important to give a personal hearing especially in such like matters. The relevant extracts reads as follows:- 'It may be that there are some who would decry the importance which the courts attach to the observance of the rules of natural justice. 'When something is obvious,' they may say, 'why force everybody to go through the tiresome waste of time involved in framing charges and giving an opportunity to be heard' The result is obvious from the start.' Those who take this view do not, I think, do themselves justice. As everybody who has anything to do with the law well knows, the path of the law is strewn with examples of open and shut cases which, somehow, were of unanswerable charges which, in the end, were completely answered; of inexplicable conduct which was fully explained; of fixed and unalterable determinations that, by discussion, suffered a change. Nor are those with a....
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....ept the version given by the learned counsel for the respondent. Lastly, but more importantly, if the entire thrust is on a meaningful and effective hearing, we do not see how a brief interaction at the time of submission of the reply by the assessee or his representative who may or may not be equipped to answer the queries raised by the TPO would help the cause of the Revenue or the assessee. In any event, it would be well nigh impossible even for the TPO to appreciate the full impact of the reply unless he has read and understood the contents of the reply filed before him. 8. In support of his submission that failure to demand oral hearing would be fatal to the challenge to the impugned order on the ground of a breach of natural justice, the learned ASG relied upon the judgment of the Supreme Court in State of Assam vs Gauhati Municipal Board: AIR 1967 SC 1398 at page 1399-1400 (para 7), and the judgment of the Division Bench of the Patna High Court in Dehri Rohtas light Railway Co vs UOI and anr AIR 1970 (Pat.) 109 page 119-120 (para 26). 9. A perusal of the facts stated in Guahati Municipal Board (supra) would show that the Supreme Court was dealing with a matter wh....
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....urt observed, that where a provisions like Section 298 is fully complied with, and the Municipal Board had neither asked for an opportunity of personal hearing or production of materials in support of its explanation, the order of the State Government could not have been set aside, on the ground that it did not call upon the Municipal Board to appear in person or produce material in support of its explanation. In the present case, there is a statutory requirement as observed, hereinabove and in fact a mandatory requirement to accord a personal hearing. Hence, it cannot be said that failure to demand personal hearing would lend efficacy to the impugned orders. 11. The other case i.e., Dehri Rohtas light Railway co. (supra) which was relied upon by the respondents is also, not of much assistance, to the respondents. The Division Bench, in this case, followed the judgement of the Supreme Court in Gauhati Municipal Board (supra). The broad facts in this case were: the Central Government was exercising a statutory power for fixing maximum and minimum freight rates for both government, as well as, private railway companies. It is in that context that the Central Government sought a re....
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....aused the loss. The notice of the District Auditor also stated that the members could make written representations to the District Auditor before he reached his decision. It is in this context the House of Lords was called upon to consider as to whether the decision of the District Auditor could be faulted on the ground that he had not given the affected members an opportunity of making oral representations. It is evident that the decision of the House of Lords was based on the circumstances obtaining in the case, the nature of inquiry, and the statute under which the District Auditor was exercising his powers. The House of Lords, noted that, the District Auditor was dealing with a group of 41 councillors who had acted in concert, in wilfully failing to discharge its duty to fix rates. They had sent their representations and none of them, it seems, had asked to be given a personal hearing. In these circumstances, the House of Lords came to the conclusion that the procedure adopted by the District Auditor was both suitable and fair. The ratio of the said decision is, as is obvious, not applicable to the facts of the case before us. In the instant case, there is not only a statutory ....
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....d right of appeal on facts and law, and a complete freedom to file evidence which was not filed before the original authority. In other words the appellate authority is required to examine the circumstances 'de novo on whatever evidence that may be put before the appellate court'. In the instant case it cannot be disputed that under the provisions of sub-section (4) of section 92 CA the Assessing Officer is required to compute the total income of the assessee in conformity with the ALP determined by the TPO. Against the order of the Assessing Officer, an appeal is maintainable under Section 246A of the Act. While the Commissioner of Appeals under sub-section (4) of section 250 in disposing of any appeal before it is empowered to make further inquiry either himself or by directing the Assessing Officer to do so and receive the result of the same, the assessee cannot file any fresh evidence except in accordance with the provisions of Rule 46A. The Rule 46A inter alia permits an assessee to adduce additional evidence only if he is able to establish that he falls under one of the following situations envisaged under the said rule:- (i) Where an Assessing Officer has either refused t....
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.... Lords. (Lloyds vs McMohan) 'My Lords, the so called rules of natural justice are not engraved on tablets of stone. To use the phrase which better expresses the underlying concept, what the requirements of fairness demand when any body, domestic, administrative of judicial, has to make a decision which will affect the rights of individuals depends on the character of the decision-making body, the kind of decision it has to make and the statutory or other framework or other framework in which it operates. In particular, it is well-established that when a statute has conferred on any body the power to make decisions affecting individuals, the courts will not only require the procedure prescribed by the statute to be followed, but will readily imply so much and no more to be introduced by way of additional procedural safeguards as will ensure the attainment of fairness.' But the flexibility of natural justices does not imply a variable standard of procedural justice. As Sedley J has observed: The well attested flexibility of natural justice does not mean that the court applies differential standards at will, but that the application of the principles (which, subject to known exc....
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....use (b) of Regulation 68, was not mandatory and that, even if it was mandatory since it was conceived in the interest of the employee and not in public interest, it could have been waived, even if the regulation used the word 'shall'. The Supreme Court also drew distinction in the said case with regard to violation of rights under a substantive provision as against a procedural provision. The Supreme Court observed that a substantive provision has normally to be complied with and the theory of substantial compliance or the test of prejudice would not be applicable in such case. It went on to observe that procedural provisions are generally meant for affording a reasonable and adequate opportunity to a delinquent officer/employee. A violation of any and every procedural provision cannot automatically vitiate the inquiry or an order passed except those cases which fall under 'no notice, 'no opportunity' and 'no hearing' categories. The complaint of violation of procedural provision should be examined from the point of view of prejudice viz. whether such violation has prejudiced the delinquent officers/ employee in defending himself properly and effectively. If it is found that he has....
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....ral hearing is mandatory and cannot be given a short shrift by the TPO. 22. The judgment cited by learned ASG to support his submission that the principles of natural justice does not necessarily imply the oral hearing and that the right of representation would suffice were cases where there was no statutory requirement to grant an oral hearing. 23. In UOI vs Jesus Sales Corporation (supra) the Supreme Court was considering the impact of the third proviso to sub-section (1) of section 4-M of the Imports and Exports (Control) Act, 1947 on the decision impugned; whereby an application for waiver of pre-deposit of penalty had been dismissed without giving an opportunity of personal hearing. In the context of the said provision and the nature of the enquiry the Supreme Court noted that the said proviso, that is, the third proviso, which vested the power in the appellate authority to dispense with the deposit of the amount of the penalty unconditionally or on some conditions did not say specifically that such orders could be passed only after hearing the parties concerned. As is obvious, the Supreme Court was dealing with the provision which was different from the one, we are conc....
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....on where the High Court had set aside a final decree or order of the DRT in a writ petition in exercise of its power under Article 226 and 227 of the Constitution of India, on the ground that the DRT had rejected the application of one of the parties before it for cross examining the deponent of an affidavit by way of evidence, filed by the bank. The Supreme Court was of the view that the High Court could not have set aside the decree/final order of the DRT in exercise of its powers under Article 226 and 227 of Constitution of India for the reasons that the grievance of the aggrieved party that it had not been afforded an opportunity of cross-examining the deponent could always be set right by way of a statutory Appeal. This case has no relevance to the facts obtaining herein. 27. The respondents also cited before us the Supreme Court judgment in the case of Hira Nath Mishra and ors. vs The Principal, Rajendra Medical College (supra). This was a case where the appellants before the Supreme Court were students of a medical college, who as per the complaints received from the girl students, late at night, entered the compound of the girls hostel and walked in the nude. Based on th....
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....icer in relation to the international transaction in issue. The show cause notice should also give an option to the assessee:- (a) both to, inspect the material available with Assessing Officer as also the leeway to file further material or evidence if he so desires, and (b) to seek a personal hearing in the matter. 30. This conclusion we have arrived at keeping in mind the nature and the complexity of the inquiry and the width and amplitude of sub-section (3) of section 92CA, which empowers the TPO to gather evidence from all available sources in the event the TPO disagrees with determination of ALP by the assessee in the first instance. Therefore, the directions issued above, if followed, would obviate any charge of breach of principles of natural justice. 31. We would now proceed to examine the sustainability of the orders of the TPO in each of the writ petitions in the light of the aforesaid discussion, while touching upon only those facts (which according to us are relevant) which impinge upon the last show cause notice issued to the petitioners prior to determination of ALP by the TPO. Moser Baer India Ltd vs The Additional Commissioner of Income Tax and Anr: W....
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.....2008, while he had time till 31^st October, 2008 to complete such proceedings. The action of the Respondent No. 1 disregarding the contentions of the petitioner to proceed without calling for the relevant details, it would be noted, was solely directed to create an unreasonable addition by considering a very high operating profit margin of 25.72% by taking into account two high profit making companies, viz. Saffron Global and Airline Financial Support Services, ignoring the other comparable companies which otherwise satisfied the comparability criteria to create.' 34. A perusal of comments made in paragraph 6.5(vii) of the impugned order would show that even though there is a reference to the contention raised by the petitioner in paragraph 32, the TPO has not accepted the claim of the assessee on the ground that the annexure which was filed with the letter dated 8.9.2008 which was in response to a show cause notice dated 1.9.2008 was not considered as the annexure 2 to the letter dated 8.9.2008 of the petitioner was not filed. It appears that those calculations which were detailed out in the said annexure were crucial to the case set up by the petitioner. The fact that t....
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.... by Infosys Technologies Limited and Satyam Computers Services which were not being undertaken by these 43 companies, to seek to exclude these remaining companies for purpose of comparison / benchmarking of the international transactions entered into by the petitioner with its associated enterprises.' 36. It is the grievance of the petitioner that even though in response to a show cause notice dated 1.9.2008 the petitioner had specifically requested the TPO to respond and /or give details or reasons as to why the data of comparable companies was not considered for the purposes of final determination of ALP by applying the TNMM method. The petitioner submits that the impugned order does not specifically deal with the said issue. It is submitted that the denial of a fair and adequate opportunity has resulted in an adjustment of Rs 202 crores and a resultant profits of Rs 486 crores, which is, far in excess of the aggregate disclosed group operating profit which includes the petitioner, as well as, the foreign associated enterprises of Rs 418 crores for the year ended 30.6.2005. These submissions of the petitioner are not rebutted. Consequently, without commenting on the merits of ....
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....rmit the petitioner to take copies of the same on payment of charges on which it proposes to rely upon in determination of the ALP. The TPO shall give, by way of a notice, an opportunity of personal hearing to the petitioner setting out the date and time for the said purpose. Global Logic (I) Pvt ltd vs. The Additional Commissioner of Income Tax and anr.: WP(C) No 8055/2008; 38. In this writ petition the order dated 30.9.2008 passed by the TPO was impugned. By the said order the TPO has made an adjustment of Rs 2,22,55,571/-to the ALP of the international transaction, involving rendering of a better software development services amounting to Rs 25.62 crores. The petitioner has impugned the order of the TPO, amongst others, on the ground that in the show cause notice dated 26.3.2008 the TPO has proposed an adjustment of Rs 3.281 crores and also that in the said show cause notice the TPO had referred to 6 comparable companies. In response to the said show cause notice the petitioner had filed a reply on 10.4.2008 wherein it had been indicated that on a correct computation of operating profit margin of six companies identified in the show cause notice the average operating profi....